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Summary
"People Still Don't Understand Visa" by John Coogan delves into the fascinating story of Visa's creation and evolution under the visionary leadership of Dee Hock. The video explores the innovative origins of the credit card system, highlighting how Hock identified and resolved the complexities of credit transactions to build a global network now used universally. It narrates how Visa grew from an ingenious idea into a critical part of routine international commerce, despite the challenges and doubts surrounding its early years. Coogan highlights Hock's impact on financial systems and his foresight in envisioning cashless societies, painting a vivid portrait of this revolutionary figure whose principles continue to drive Visa's success today.
Highlights
Dee Hock used a clever audience trick highlighting how little people knew about Visa, despite its ubiquity. 🎩
The creation of Visa stemmed from Hock's innovative thinking and a response to credit market challenges. 🧠
Hock foresaw a future of electronic transactions long before digital currencies took off. 🔍
Visa rocketed from a bold concept to a global necessity, showcasing the capacity of visionary leadership. 🚀
Visa's unique organizational structure demonstrated the success of combining competition with cooperation. 🤝
Overcoming initial roadblocks, Visa transformed into a market leader with an indomitable presence. 🦾
Hock's departure didn't stop Visa's growth; the brand continued to expand and influence worldwide commerce. 🌐
Key Takeaways
Dee Hock revolutionized the financial world by creating Visa, a groundbreaking global payment system. 💳
Visa emerged from the innovative restructuring of credit systems, solving complex transaction issues. 🚀
Hock predicted the rise of electronic money, paving the way for a cashless society. 🔮
Visa's exceptional growth highlights the power of bold ideas and cooperative competition. 🌍
Despite early struggles, Visa became a dominant force, thriving through strategic adaptations. ⚡
Overview
Dee Hock, Visa's ingenious creator, started with a simple idea – to turn complex credit transactions into a seamless global network. His journey began with addressing the difficulties banks faced in credit processing, leading to the revolutionary concept of Visa. Hock's vision was not just about cards; it was about changing how monetary systems work, laying the groundwork for modern digital transactions.
Back in the late 1950s, consumers struggled with cumbersome credit systems. Hock, with his inventive spirit, crafted a four-sided payment network that set the stage for Visa's emergence as the backbone of global commerce. His decentralized approach allowed banks to cooperate while still competing, ensuring Visa's steady growth despite initial resistance from traditional banking institutions.
As Visa evolved, Hock's foresight and stubborn adherence to his principles pushed the company towards monumental success. By introducing machine-readable cards and a novel point-of-sale system, Visa simplified transactions, shaping the future of payments. Today, Visa stands as a testament to Hock's legacy, dominating the financial world with unmatched efficiency and reach.
People Still Don't Understand Visa Transcription
00:00 - 00:30 one of De Hawk's favorite rhetorical tricks whenever he spoke in public was taking a Visa card out of his wallet and showing it to the audience he'd asked the audience how many of you recognize this of course everyone would raise their hands okay D would say now how many of you can tell me about the company that makes this card how it was started how it was governed at that point everyone pretty much had to sheepishly put their hands down because they didn't know every time dhawk played that little trick on his audience he was touching on one of the biggest paradoxes in business everyone knows what visa is
00:30 - 01:00 except they don't really know anything about it I just thought that was totally fascinating so I decided to dig into the history of Visa what I discovered is one of the most incredible businesses ever built designed by one of the most fascinating business people ever it's a mindblowing story and I'm really excited to share it with you to fully understand how Visa started we have to go back in time to the late 19th century for hundreds of years people everywhere had BAS basically
01:00 - 01:30 lived the same way they farmed their own food made their own clothes and tools and rarely traveled more than a few miles from their home Technologies like the Telegraph and the steam engine changed that all of a sudden Journeys that previously took weeks could be made in just hours by allowing people to travel further and faster the transportation Revolution created bigger economic markets in response to the Newfound opportunities to make money merchants and entrepreneurs created a dazzling new class of consumer goods like cars sewing machines and refrigerators these Innovations promised
01:30 - 02:00 to save time and energy but most people couldn't afford them at least not upfront so the same merchants and manufacturers that made and sold the consumer goods came up with another Innovation credit instead of paying 100% of the price upfront a consumer could just put a little money down and pay the rest over time almost overnight Goods that had previously been unaffordable became affordable for the growing middle class it was great for consumers and great for merchants who realized that if people could pay for something in the future they were more likely to buy it today they quickly seized on this
02:00 - 02:30 knowledge and kept innovating a company in New York created something called the charge plate a small metal plate that looked like a dog tag which was engraved with customer information the customer would sign a small piece of paper whenever they use the charge plate to buy things Standard Oil mailed out cards which their customers could use at any of their gas stations across the country there was tons of stuff like this so it wasn't a surprise that before long most consumer goods in the US were sold on credit but even though credit was a huge breakthrough it had problems basically
02:30 - 03:00 it was just a huge pain for the merchants and customers Merchants had to assess each individual customer's creditworthiness they had to face the risk of delinquency and plain old fraud then there were all the expenses that came with managing thousands of accounts it was a headache for customers too whenever they wanted to make a purchase on credit they had to travel to either the store where they wanted to buy something or to their Bank hand over their entire Financial history and fill out a bunch of paperwork because this was such an inefficient process most merchants and Banks avoided making small
03:00 - 03:30 loans except for one bank that is the Bank of America the Bank of America was unique it actually began life as the bank of Italy which was founded to extend credit to underbanked Italian immigrants in California at the time it was illegal for banks to operate across state lines so the Bank of America formerly the bank of Italy was actually more like the Bank of California because of its large population California was pretty much the only state in the US where it was viable to operate a large consumer Bank this is an important detail because it
03:30 - 04:00 gave Bank of America its Niche providing lots of small Consumer loans to the growing middle class because they gave out so many loans the bank's Executives were desperate to make the process more efficient one of the bank's senior vice presidents a guy named Joseph P Williams looked around and realized something people were already familiar with the basic idea behind using cards to pay for stuff Diner club which had launched after a New York businessman named Frank mcera left his wallet at home and couldn't pay for his lavish business dinner had been around for almost a decade American Express one of Bank of
04:00 - 04:30 America's Main competitors had even launched their own premium travel charge card Banks were providing people with credit and companies were issuing cards to their customers what if Bank of America combined those Concepts and issued its customers a card which provided pre-approved credit without confining them to just one Merchant or product customers would have total flexibility when and how they paid the loan back and if they missed a payment they would start incurring interest today we take the concept of a credit card basically for granted but at the
04:30 - 05:00 time it was Radical so Williams knew the Bank of America had to convince merchants and consumers to embrace the concept and he knew it wasn't enough just to convince merchants or customers he had to do both or the product would fail convincing Merchants turned out to be way easier than Williams or anyone at Bank of America had anticipated even though Merchants would have to give Bank of America a 6% cut they knew they'd end up saving money because they could now Outsource the credit process things like maintaining accounts chasing Collections and managing working capital would all be become Bank of America's problem and
05:00 - 05:30 that's before you even factored in the possibility that customers would increase their spending across the board before Bank of America launched their credit card more than 300 shop owners had signed up the customer side looked trickier how could Bank of America convince people to use the card and take out more debt in the process where would they even launch the pilot program it looked like a tough nut to crack until Joseph Williams decided to smash the nut with a sledgehammer what if Bank of America just mailed out a bunch of pre-approved credit cards to customers
05:30 - 06:00 the test site had to be just right big enough for critical mass but small enough so that if the experiment failed the reputational damage would be contained oh and Bank of America had to already have a big market share one city fit the profile perfectly Fresno on September 18th 1958 65,000 unsuspecting Fresno residents opened their mailboxes to discover that they'd been sent a brand new bank America card it wasn't the first ever credit card but nothing on this scale had ever been attempted before local residents had no idea this
06:00 - 06:30 was in the works and they had no idea what to do with the cards so in order to teach people how to use their new bank America cards and persuade others to sign up for one the Bank of America commissioned an advertising campaign it had that classic 1950s blend of innocence and ambition carry your credit in your pocket the newspaper ads announced just one payment to make at the end of the month they added seeing that so many local residents had become card holders overnight merchants in Fresno realized they basically had no choice but to sign on to the bank
06:30 - 07:00 americard program too so well in fact that Williams and his colleagues at the Bank of America became concerned that other Banks would launch their own credit cards they knew they had to move quickly so before the results of the Fresno pilot were even in they expanded the bank americard program to Los Angeles San Francisco Sacramento Bakersfield Modesto and then everything fell apart the same day Bank of America mailed out thousands of credit cards de Hawk was about 200 Mi South working at an investment company in Los Angeles despite being still in his 20s he'd
07:00 - 07:30 already come a long way born in a small mountain town of Utah Hawk was a self-educated man who refused to follow conventional thinking he ended up walking away from three separate fast-track jobs including that La Investment Company because he thought that top- down organizations killed creativity and risk-taking he knew there was a better way a way to structure a business that harnessed creativity instead of killing it he moved to Seattle to take a job with a small bank but that wasn't any better before long de was just punching the clock resigned
07:30 - 08:00 to the fact that no one would ever take his Maverick ideas seriously we'll come back to D soon but for now let's go back to California the Bank of America had just expanded its Bank America card pilot program it was hugely Popular by the beginning of 1960 around 2 million cards were in circulation and 20,000 Merchants were part of the program and then the bank's Executives including Joseph Williams learned a hard lesson of being in the credit business when you offer people money today against the promise to pay back at a later date some
08:00 - 08:30 people will do the buy now part and then skip out on the pay later part he predicted that delinquencies would average around 4% they ended up being more than 20% Bank of America hadn't made any provisions for collections these mistakes ended up costing the bank around $20 million a lot of money in the late 50s and they ended up costing Williams his job for everyone except him though the losses ended up being a blessing in disguise because they discouraged other Banks from developing their own credit cards Bank of America sto stumbled into an opportunity to
08:30 - 09:00 refine its product without competition within 3 years it had solved the early teething problems and started turning a profit and until five other Banks launched a competitor product called Master charge in 1966 Bank of America had the entire State of California to itself but as big as California was it was still just a single Market Bank of America's Executives believed that the bank americard could take off in other markets but they were constrained by laws which forbid Banks from having out of-state customers so instead of expanding the program they did the next best thing they licensed the bank amera
09:00 - 09:30 card to different banks around the United States under the terms of the program Bank of America charged license Banks a $25,000 entry fee plus ongoing royalties on total card holder spend in return the ly Banks would be taught how to run a credit card operation it was kind of like a McDonald's franchise the licensing program created an entirely new paradigm for the first time merchants and customers could have different banks in theory A customer from upstate New York could use the Bank
09:30 - 10:00 of America card that they got from their local bank to buy something on holiday from a merchant who is affiliated with a bank in Hawaii Merchants could massively widen their pool of potential customers and in turn customers got to use their credit card at a growing number of merchants so it was a major shock to everyone involved when the licensing scheme collapsed almost immediately partly it failed because Banks resented being turned into glorified outposts of Bank of America they were geared to compete not cooperate but there was also a deeper structural reason why the scheme failed to understand why we need
10:00 - 10:30 to get into the weeds of banking just a little don't worry when Bank of America first introduced the bank americard it created a two-sided network with merchants on one side and customers on the opposite side but everyone still belonged to the same bank now that merchants and customers could belong to different banks two major problems arose the first one is authorization authorization is what makes it possible for a merchant to know that a customer's card is valid and that they aren't exceeding their card limit it's pretty easy to authorize a transaction when the customer and Merchant belong to the same
10:30 - 11:00 bank the merchant just calls their bank usually referred to as the acquiring bank and asks if the card holders account is in good standing but it's much more complicated when the customer and Merchant use different banks the shopkeeper still calls their bank but now the acquiring bank has to make a call too they need to call the bank that gave the customer the credit card that second bank is known as the issuing Bank the official from the issuing bank had to put the guy from the acquiring Bank on hold while they checked to see if their customer could afford the purchase all the while the customer and the
11:00 - 11:30 shopkeeper are just standing around making small talk and that's when the process ran smoothly remember this was before computers everything was done via phone what if one of the bank officials was busy or if a customer belonged to a bank on the East Coast tried to buy something late in the day in California if the banks couldn't talk to each other the merchant had to decide on their own whether to allow the customer to pay with a card or lose the sale if the card turned out to be stolen then the banks would fight about who should eat the loss so that's problem number one authorization problem number two is
11:30 - 12:00 known as interchange this is the way that the two Banks the acquiring bank and the issuing Bank settle their accounts with each other let's use our little example from before the customer from upstate New York who buys something when they're on holiday in Hawaii remember they're not using their own money they're using credit in other words they're using the New York bank's money the Hawaiian Bank needs a failsafe way to get reimbursed by the New York bank and back in the pre-digital age this was an insanely inefficient process the Merchants Bank the acquiring bank
12:00 - 12:30 would literally mail boxes full of paper sales receipts to issuing Banks across the country the issuing Banks then had to match up the receipts with their customers accounts reimburse the acquiring bank and then build their card holder this happened every single day and it was one thing to settle accounts with five banks or 10 or 20 imagine trying to settle accounts with hundreds of different banks and thousands of card holders unsurprisingly the banks that signed up to the americard program noticed that their back room started filling up with unprocessed transactions and their customers were going unbuild
12:30 - 13:00 in short it was a mess Bank of America had created its own credit card to solve the logistical issues involved with lending money but in the process it had inadvertently created a much more complex problem what used to be a two-sided network with a customer on one side and a merchant on the other became a four-sided Network the lcy banks were Furious back on the west coast dhawk was still punching the clock at the National Bank of Commerce in Seattle when his boss gave him 90 days to set up a bank America C program he did as he was
13:00 - 13:30 directed but he harbored deep doubts about the licensing program he thought he knew how it could work better but after the disappointment he'd already experienced throughout his career he'd learned to keep his opinions to himself no one had thought to ask him what to do why would they he was just a middle manager at some small fry Bank okay let's quickly recap in September of 1958 Bank of America launched the pilot of the first widely available credit card it went so badly that it discouraged rival Banks from introducing their own card this ended up giving giving Bank of America the space to turn it around and
13:30 - 14:00 make it a profit Center in 1966 the bank's Executives were ready to expand the scope of the original program by licensing it to Banks outside of California this went well until the system collapsed under its own weight ly Banks started losing so much money that their situation quickly became existential they demanded an opportunity to air their grievances with their parent Bank everyone agreed to meet and Hammer out the issues the Len e Banks sent their top guys but bizarrely Bank of America only sent two middle managers it's like the seite wanted to show how
14:00 - 14:30 unimportant this was for them obviously it wasn't a great situation for those managers they didn't have permission to agree to anything in order to get the summit over and done with they suggested establishing a committee to further study the problem how could anyone disagree with that one of the people appointed to that committee was our friend D Hawk of the National Bank of Commerce just as the meeting threatened to boil over D not the Bank of America guys stood up in front of everyone and suggested that instead of just taking a list of grievances to Bank of America he
14:30 - 15:00 tried to design a better way for the whole system to operate and brought it back to the whole group for a vote the Bank of America guys didn't care they just wanted to get out of there everyone else realized that this was the best outcome they would get the summit wrapped up and de Hawk had his mandate to design a better system he knew it would be a challenge but he also knew he was ready despite his formal schooling ending after just two years of Community College Hawk had been a voracious reader since before he could remember his reading which Spann all kinds of different disciplines convinced him that
15:00 - 15:30 the way organizations were structured was response to the specific circumstances of the Industrial Revolution a top- down structure was fine for a factory or a bank but as technology progressed and ideas began to gain traction and importance organizations needed to become better at harnessing human creativity dhawk believed that the organization of the future needed to be decentralized self-organizing and self-governing so for months he reflected on how he could apply those principles to the problem at hand he realized that the bank merard
15:30 - 16:00 licensing system contained a fundamental flaw the banks didn't trust each other so in order to achieve this de envisioned a new type of organization it would be owned by the same members it served but ownership wouldn't be measured in stock instead it would be measured in how much business activity each member brought to the group the organization would be self-organizing and self-governing members would have a vote on the issues that affected them which encouraged cooperation and perhaps most importantly they trust each other D had no intention of preventing Banks
16:00 - 16:30 from competing he was a capitalist but at the time he thought that adding a dash of socialism would incentivize them to grow the size of the pie rather than just grabbing the biggest piece for themselves D knew it was a radical proposal but he also knew it had almost unlimited potential coming up with the idea was the easy part he'd been mulling over how to build a better Organization for years but now he needed to solve a whole bunch of organizational and Technical problems to start he had to convince Bank Bank of America to give up
16:30 - 17:00 control at first the senior vice president in charge of the licensing system wouldn't hear it we invented the system he screamed we are responsible for 40% of the transaction volume D knew that Bankers were hard to separate from their egos so he held on to a concept he picked up during his college debating years until someone has repeatedly said no and adamantly refuses another word on the subject they are in the process of saying yes and don't know it it took a few days but D eventually convinced him and other Bank of America exec to spin
17:00 - 17:30 off the bank americard program into its own Standalone entity co-owned by all other member banks the second problem de needed to solve was actually crafting the operating guidelines that governed how the banks interacted with each other he knew how important this was if he got this wrong the idea would fail he took a few of the other committee members to an offsite at a hotel in a little town just north of the Golden Gate Bridge there over the course of a few days they hammered out the guidelines there were four key principles the first was that
17:30 - 18:00 ownership in the new organization would be represented in the form of participation Banks would be members they couldn't back out and they wouldn't own stock either their ownership share would effectively be determined by the volume of transactions they accounted for in the network the second principle was that every member so every Bank in other words would have a say in how the organization ran and they could vote on anything so long as other members agreed the third principle was that the organization existed to facilitate cooperation build trust and grow the size of the
18:00 - 18:30 bank America card payment Network larger than any One Bank could on its own the final principle was that any of the guidelines that governed the network could be changed provided enough members voted for change with the mission statement in his back pocket D hit the road he got some of the Bank of America Executives to help him set up meetings with the banks that were part of the old Network hundreds of banks hundreds of meetings after almost 2 years D got every single Bank to commit to the new network one of the reasons why is before he ever met with any of the banks D paid
18:30 - 19:00 a visit to Washington he knew that hundreds possibly even thousands of banks teaming up would probably raise alarms about anti-competitive Behavior at the Department of Justice suddenly the stakes were ratcheted even higher if a bureaucrat wanted they could shut the whole thing down before it even got off the ground and they'd have a reasonable case because D was basically proposing a cartel so he decided to approach the problem in an unorthodox way instead of arguing the point he took it in stride yes the whole premise of the network he was trying to build was to get Banks
19:00 - 19:30 working together and that was anti-competitive but the end result would be so valuable to Consumers and businesses that the US government should let it proceed anyway and amazingly that's exactly what the doj did they even provided D with a letter confirming they wouldn't try to Outlaw the network now that he had Bank of America the old participating Banks and even the US government on board D was ready to launch the new network the old Bank America card licensing system became an entirely new Standalone entity National Bank Amer ER card Inc and the
19:30 - 20:00 self-educated boy from North Utah who turned down three FastTrack banking jobs because he just couldn't go against his principles was appointed its inaugural CEO D allowed himself a moment of quiet satisfaction after years of disappointment he'd finally had the opportunity to shape an organization according to his own principles he was excited about its potential but he also knew that establishing the network was just a small part of the job as CEO his first priority was to build the backend that would enable member Bank to interact smoothly and efficiently after
20:00 - 20:30 all that was the whole point D knew that he could talk about decentralized organizations all he wanted but if he couldn't build a system that actually worked and fast then the whole thing was toast and so was he D had sold everyone an idea but turning an idea into a working payments Network needed a lot of technology to be created so let's talk about how that happened the first technical problem that needed to be solved was authorization I talked about this earlier authorization is basically the name given to the process of deter mining if a customer can afford the
20:30 - 21:00 purchase they're trying to make one of the reasons that the old Bank americard licensing system collapsed is because it relied on a chain of bank-to-bank phone calls that could take 20 minutes or fail entirely the authorization protocol needed to be better especially because D had actually received buyin from overseas Banks so even though the new network was called National Bank America Inc in practice it was Global from day one that meant authorization couldn't just work a little better it had to be a paradigm shift D quickly wrote a project
21:00 - 21:30 description and invited technology companies to bid for the work all the bids came in over budget and way over time so D did something unusual he decided the network would build the technology in-house he recruited a guy from The Firm that impressed him most during the bidding process and told him he could have all the resources he needed to build a tiger team oh and he gave him 9 months to build the tech from scratch the first step was building a nationwide Telecom Network to ensure that Banks could communicate efficiently with each other then the team had to
21:30 - 22:00 build and install computer systems in each of the member banks and train Bank staff to use them properly finally they needed to build a new data center to make sure the system stayed online miraculously they pulled it off the second technical problem D and the team needed to solve was settlement moving the money where it needed to go whereas authorization is the front end of the transaction settlement is the back end this was a really complicated computer science problem think about it under the previous system Banks had to manage their individual relationships with every other bank in the network so as
22:00 - 22:30 the network grew the number of interactions increased exponentially until the whole thing collapsed everyone working on the problem knew that the solution was Simplicity not more complexity so they approached the problem from a different angle what if they created a massive Ledger that sat between the banks that way instead of manually managing their relationships Banks could just log their debits and credits in this Ledger and then settled them at regular intervals by adding another level you could rad I Ally simplify the whole process the concept D
22:30 - 23:00 and the team proposed is called an automated clearing house today an a is the standard way of managing complicated banking relationships but back then it was a New Concept and yet D and his team had it up and running within just a couple years automating the authorization and settlement processes achieved amazing results transactions could now be processed 247 365 and were settled every single night authorization times dropped from an average of 5 minutes to to just 50 seconds and
23:00 - 23:30 overhead costs were reduced by $17 million in the first year alone dhawk had convinced the participants of the old Network to keep the faith he'd repaid the Faith by building strong foundations for the network to grow but he knew that the key part of his pitch to Banks was that the unusual organizational structure would actually help grow the size of the network and grow the banks bottom lines solving the authorization and settlement problems helped with that but to really Drive The increased customer adoption that the banks crave he had to build a brand
23:30 - 24:00 fortunately one important brand element the color scheme was already in place when Bank of America First rolled out its new credit card in 1958 they'd hired a designer who lived in Pleasanton a city on the East Bay of San Francisco one morning or so The Story Goes the designer was sitting on his back porch looking at the hills behind his house when he was struck by the combination of the bright blue sky the puffy white clouds and the golden blanket of California poppies he rushed back inside and painted an abstract version of what
24:00 - 24:30 he saw and voila that was the birth of the famous blue white and gold bands D knew the color scheme was a keeper but he still needed a name National Bank of amard just wouldn't cut it especially outside the US and he needed it soon because as impressive as the National Bank accard network was it actually wasn't even the market leader earlier I mentioned how back in 1966 five rival Banks had started their own product Master charge to compete with the Bank of America 10 years later Master charge was bigger than National Bank Amer card
24:30 - 25:00 it wasn't a huge Advantage but it was clear the Master charge Network contained about 7,400 Banks compared to 7,000 and about 37 million card holders to 31 million D knew that the right name could be the difference between staying in second or taking the lead but he also knew he wasn't the right guy to come up with it so he asked his staff colleagues and other members of the network to come up with ideas it was a test of how well everyone could cooperate D laid down some ground rules the new name had to be short easy to say and easy to understand
25:00 - 25:30 in as many languages as possible the international arm of the bank americard Network carried out some research and suggested the name Visa it ticked all the boxes D asked everyone what they thought the response was unanimous the name was perfect it was memorable while being easy to say spell and remember at the same time by Conjuring the image of an entry Visa it made people think of new experiences and Treasured Memories just one small problem it turned out a little Country Bank in Bloomington
25:30 - 26:00 Illinois already had the trademark registered for one of their savings accounts after a few months of negotiation the international arm of the bank americard Network bought the rights to the name under the terms of the agreement the mlan county bank received a nice payday and still got to use the name for their vacation inspired savings account it wasn't cheap but D and the member banks got what they wanted in early 1976 the bank of maricard network officially became Visa the name change was an inspired business decision for two reasons firstly because of the
26:00 - 26:30 operating regulations that bound all the member banks all of the old Bank America cards had to be migrated to Visa cards that kicked off an arms race between all of the member banks which furiously started competing to steal each other's customers and bring in new ones some banks won others lost but the network itself grew bigger the second reason the name change was so successful is that it allowed D to change people's perception of what visa was through advertising in a technical s Visa is both a network of
26:30 - 27:00 Banks and a technical protocol that facilitates transactions which use its branded cards but believe it or not that explanation doesn't really get customers excited D didn't have a natural affinity for advertising he was a country kid from northern Utah not a slick executive from Manhattan but he also knew from personal experience that a good idea didn't always speak for itself it needed to be packaged in the right way so we commissioned an advertising campaign to introduce visa to customers across the United States on the surface the
27:00 - 27:30 campaign explained the name change why is Bank americard becoming visa to keep up with you but what it really did was portray Visa as a gateway to a better life better shopping better restaurants better holidays they were all within reach you just needed a Visa the campaign was a massive success it marked the beginning of a change in Attitude among American consumers from thinking that credit was slightly embarrassing to thinking that it was aspirational and the combination of increased consumer demand and increased competition between
27:30 - 28:00 Banks meant that the number of Visa card holders went up by 45% in just one year Visa's growth curve during the 1970s was phenomenal the network went from a few hundred member banks to tens of thousands Banks merchants and customers were all prospering its main competitor Master charge which also rebranded to MasterCard couldn't keep up it looked like it would just be one long Victory lap until the end of time but D could never sit still he believed Visa was just beginning to scratch the surface of
28:00 - 28:30 its potential he was ready to make his next move what he didn't know at the time was that it would end up costing him his job let's go back to that ad I showed earlier I mentioned that it did two things it introduced Visa's Rebrand from National Bank americard and it also pitched Visa as an aspirational consumer brand but if you look closely it also did a third thing maybe if I show you this ad from 1972 a couple years before the name change it'll be clearer do you see it it's easy to miss think think of it as money these might look like
28:30 - 29:00 throwaway lines meant to get people used to the idea of using a plastic card to pay for stuff instead of Good Old Reliable cash and they are but they also contain the seed of De Hawk's most radical idea see he didn't think he was in the credit card business at all he thought he was in the business of monetary value exchange okay that sounds pretty abstract so let me explain there's a fascinating passage in the book D ended up writing about his time at Visa any organization that could guarantee transport and settle
29:00 - 29:30 transactions in the form of arranged electronic particles his phrase for digital information 24 hours a day 7 days a week around the globe would have a market this Necessary Technology had been discovered and would be available in geometrically increasing abundance at geometrically diminishing costs no previously existing organization could do anything like that before D created visa for him the fact that Visa's main product was credit cards was just a coincidence in dword Visa was the first
29:30 - 30:00 truly transnational Corporation it's a worldwide consumer payment system including but not limited to credit cards he believed that in the future money would be nothing but alpha numeric data in the form of arranged energy impulses that moved around the world at the speed of light at minuscule cost today in a world with crypto and cash app and real-time payments that looks like a scarily accurate prediction of what the payment system would become but
30:00 - 30:30 the problem was that back in the late 1970s Banks saw all this as a threat because in a world where money was just information they were less important and if they were less important they might lose business that wasn't part of the deal Visa's member banks were willing to humor D for his unconventional ideas and they loved when those ideas brought them extra business but D was determined to Never back down from his principles ever again in 1979 he'd signed up one of the largest US retailers JC Penney as a Visa Network member at the time he said that
30:30 - 31:00 many Bankers refused to realize that many large retailers can do everything a bank can do and often better the relationship between D and the banks never truly recovered it was like a Shakespearean tragedy for years people told D that his ideas about how organization should work were weird and impractical he persevered until he was proven right spectacularly but the same refusal to tow the line was what eventually ended up costing him his job he ended up designing in 1984 but before he did there was still time for him to
31:00 - 31:30 oversee one more massive game-changing breakthrough the fundamental law of retail is the harder it is for a customer to buy something the less likely they are to do so and the less likely a customer was to proceed with a purchase the less likely a merchant was to accept Visa D knew Visa needed to improve the speed of transactions in order to do that he needed to do two things the first was to make Visa a cards machine readable the second thing
31:30 - 32:00 was to digitize the point of sale terminal in the Merchant's place of business this first part was relatively easy the technology to attach a magnetic strip to a plastic card already existed the second part of the equation a digital point of sale terminal was much tougher these are needed to mass-produce a small portable cheap device and distribute it to millions of merchants around the world it was very outside their wheelhouse but that didn't mean it couldn't be done so just like they did a couple of years earlier with the authorization protocol D wrote down what he wanted and invited different
32:00 - 32:30 technology vendors to bid on the work the winning bid came from a small Florida based company called verone together verone and Visa came up with a $500 device that could sit on a Merchant's countertop and read customers cards in order to incentivize Merchants to actually buy the device D offered them a temporary discount on the transaction fees they had to pay the verone devices were hit Merchants made their money back and more and fraud was significantly reduced digitizing the point of sale was the final piece of the puzzle at last customers could walk into
32:30 - 33:00 a shop swipe their Visa card and walk out a few seconds later it was the birth of the modern payment system we all use today but it wasn't enough for D to save his job after he left he didn't join another company instead he moved to a 200 acre ranch he owned west of Silicon Valley and became a Rancher as far as the business world was concerned he dropped off the face of the planet his story hasn't finished yet though but for now I want to talk about how Visa went about building one of the most incredible businesses imaginable all
33:00 - 33:30 right it's time to talk about how Visa makes money the first thing to know about Visa's business model is that they get paid every single time one of their cards is used which happens more than 8,500 times a second a customer swipes their visa the Merchant's verone device runs the card and engages the acquiring bank which consults Visa's authorization protocol visanet which checks with the issuing bank if the customer is good for the payment once that check is complete the response flows back down the chain
33:30 - 34:00 the other way today that entire process takes about a second maybe even less in the space of that second Visa earns money in two main ways the first is through interchange fees whenever a customer or business makes a transaction on Visa rails their Bank known as the issuing Bank earns a percentage of the transaction amount and it also pays Visa in even smaller percentage the second way is through authorization processing fees those go to the Merchants Bank also known as the acquiring bank and thech technology provider they use to process the payment Visa gets a fixed amount of
34:00 - 34:30 that fee there are other fees like crossborder fees and payment assessment fees here's how they work in practice say someone buys $100 worth of a product the merchant gets about 98% of that most of the remaining 2% goes to the issuing Bank remember that's the bank that issued the Visa card that the customer used to pay for the product it's a big chunk but that's because the issuing bank has to pay a lot for customer acquisition and because they Bear all of the fraud risk about half of what's left depending on where you are goes to the
34:30 - 35:00 Merchants Bank the technology provider that processes the payment on behalf of the Merchant Bank think First Data gets a chunk too Visa doesn't actually get much maybe 20 cents of that $100 that was spent but making 20 cents 8,500 times a second is pretty good now the cool thing about Visa's Revenue sources is that they scale differently interchange fees scale with the size of the transaction that makes it an incredible hedge against inflation the more the thing costs the more money Visa makes authorization processing fees
35:00 - 35:30 scale with the number of transactions that happen on the network and since Visa's marginal costs are minuscule it costs them about the same to process a million transaction as it does to process a billion it's a virtuous cycle as more card holders spend more money more merchants accept Visa which then makes more people realize they need a visa the flywheel has been spinning for decades which makes it surprising that in 2007 the financial institutions that owned Visa decided it was time to go public analysts offered a few reasons
35:30 - 36:00 why to free up capital for some planned Acquisitions and to create equity for talent retention but maybe the main reason was that there was a major class action lawsuit going on basically Merchants argued that Visa Mastercard and other major credit card providers fixed interchange fees at artificially high levels and interfered to prevent customers from using cheaper forms of payment MasterCard went public without ever really clarifying if new Shar shareholders would be potentially liable and that led to their IPO being a bit
36:00 - 36:30 rough Visa wasn't going to make the same mistake as their great rival it split its shares into two classes only the class B shares which were owned by the member banks would be exposed to potential liabilities resulting from the lawsuit new shareholders would own protected class A stock because of this strategy Visa's strong Market position and really strong Global growth in card transactions the IPO was amazingly successful it raised $18 billion at an initial market cap of 90 billion at the
36:30 - 37:00 time it was actually the biggest us-based IPO ever visao public was the beginning of a new era but it was also the end of something truly special D proved to the world that competition and cooperation could coexist to create a democratic organization that was genuinely run by its members it's a little sad to learn that in 2007 Visa became a little bit more like any other company D was more critical than anyone of the ways in which Visa failed to live up to its promise even when he was still Visa he opposed the idea that Banks could join both visa and MasterCard he
37:00 - 37:30 believed that allowing them to do so would make it impossible for new competing Payment Systems to emerge after he retired he kept expressing his disappointment that merchants and card holders couldn't directly join visa and maintained that the Visa Mastercard duopoly was bad for customers and Innovation maybe on some level he thought it was a personal failure that there was a flaw in the initial design of the Visa Network or more he could have done in the early days to promote competition either way it's fascinating
37:30 - 38:00 to see that D maintained his principles even though his principles ended up costing him his job frankly from a customer and Merchant perspective I can see his point Visa has built an impregnable moat it offers Merchants an unbeatable value proposition join us and gain instant access to a network of more than 4 billion cards 15,000 Banks and millions of merchants and over 200 countries and territories as a merchant you really can't afford to not accept Visa or Mastercard even if there's screwing you on the fees it's almost impossible to see someone else building
38:00 - 38:30 another visa to start you'd need to win over the banks it was hard enough when D did it and he only had to deal with a few hundred now there's thousands tens of thousands the only entities that could really compete at scale with Visa are National governments today more than 700 countries including the US UK Brazil and India support real-time payments that clear in seconds rather than days but even in countries where real-time payments have been around for a long time they still haven't dislodged Visa in Japan the first country to introduce real-time payments they only account for
38:30 - 39:00 about 3% of all transactions and the thing is in developing countries real-time payments are actually accelerating the adoption of Visa pretty much everything and everyone that looked like a potential rival to Visa's business has turned out to be a partner I'm old enough to remember when people said that buy now pay later companies like afterpay and Clara were going to eat Visa lunch well guess what it turns out that those companies rely heavily on the debit card rails that Visa operates about 80% of all buy now pay later purchases are repaid via debit and
39:00 - 39:30 because debit fees include a fixed component slicing a repayment into smaller payment chunks means more money for Visa there are challenges on the horizon there always are card adoption is slowing down because most people have already stopped using cash and because young people don't like carrying plastic crypto might turn into the Global Currency that he always wanted visa to become even if so far consumers don't like using it to pay for Stuff perhaps the biggest challenge is simply that
39:30 - 40:00 Visa might not have much more room to grow but to be honest I don't even buy that because the reality is Visa's revenues are skyrocketing in 2020 revenues were $21 billion in 2023 they were almost $33 billion I kind of assumed that it had just been growing steadily since day one but that's not the case factors like inflation the continued move away from cash and growth into new markets and new services like cyber security and fraud Analytics mean that the money is pouring in faster than ever the numbers are staggering in 2022
40:00 - 40:30 Visa processed 190 billion transactions totaling trillion dollar worth of payments in case you're wondering that's about 15% of global GDP it's the world's biggest credit card payment processor by transaction volume it has a 40% global market share and more than 60% of the US market it makes bigger profit margins than Apple Microsoft and alphabet way more Visa is in short the ultimate to to Booth it takes a royalty on global economic growth and it's here to stay
40:30 - 41:00 after almost 10 years in self-imposed Exile de Hawk returned to public life in the early 90s he started giving public lectures and wrote books that expanded on his career and his Maverick ideas about how company should be structured he died at his home in Washington in July of 2022 at the age of 93 I'll be honest before making this video I didn't really know much about him so it's been an amazing experience to learn that he was actually one of the most incredible 0 to1 rurs in history he built the foundations of a company that looks like
41:00 - 41:30 it could Last Forever by sticking true to his beliefs and refusing to obey rules that didn't make any sense it's tempting to look at D's story and see the outline of the modern-day Silicon Valley founder but the difference is that they're following a trail that stubborn Visionary brilliant people like d blazed in the first place thanks for watching